Pricing VIX options with stochastic volatility and random jumps

Guang-Hua Lian and Song-Ping Zhu ()

Decisions in Economics and Finance, 2013, vol. 36, issue 1, 88 pages

Abstract: This study presents an analytical exact solution for the price of VIX options under stochastic volatility model with simultaneous jumps in the asset price and volatility processes. We shall demonstrate that our new pricing formula can be used to efficiently compute the numerical values of a VIX option. While we also show that the numerical results obtained from our formula consistently match those obtained from Monte Carlo simulation perfectly as a verification of the correctness of our formula, numerical evidence is offered to illustrate that the correctness of the formula proposed in Lin and Chang (J Futur Markets 29(6), 523–543, 2009 ) is in serious doubt. Moreover, some important and distinct properties of VIX options (e.g., put-call parity, hedging ratios) are also examined and discussed. Copyright Springer-Verlag 2013

Keywords: VIX options; Heston model; Explicit and exact solution; Stochastic volatility; C2; C13 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (28)

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DOI: 10.1007/s10203-011-0124-0

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